MSCI China A-Share Inclusion: A Long Term Catalyst For The ... · MSCI China A-Share Inclusion: A...
Transcript of MSCI China A-Share Inclusion: A Long Term Catalyst For The ... · MSCI China A-Share Inclusion: A...
KBA
1
30/Jun/2020
MSCI China A-Share Inclusion: A Long Term Catalyst For The Mainland Chinese Equity Market
Overview of the KraneShares MSCI China A Share UCITS ETF (ticker: KBA)
2
Introduction to KraneShares
About KraneShares
Krane Funds Advisors, LLC is the investment manager for KraneShares ETFs. The firm is focused on providing investors with strategies to capture China’s importance as an essential element of a well-designed investment portfolio. KraneShares ETFs represent innovative, first to market strategies that have been developed based on the firm and its partners’ deep knowledge of investing. These strategies allow investors to stay current on global market trends and provide meaningful diversification.
In 2019, KraneShares established a London headquarters to better deliver its renowned China-focused ETFs to European investors. In addition to launching Europe-specific versions of its most popular US-listed funds, KraneShares also develops strategies tailored to meet the specific needs of its European clients.
Introduction
Investment Strategy:KBA is benchmarked to the MSCI China A Index which captures large and mid-cap representation across China securities listed on the Shanghai and Shenzhen exchanges (A-shares). Over the coming years, MSCI will complete the incremental inclusion of China A-shares into their Global Standard Indexes, including the MSCI Emerging Markets Index, which may potentially benefit the securities KBA holds today. The MSCI China A Index is designed for global investors accessing the A-share market using the Stock Connect framework and is calculated using China A Stock Connect listings based on the offshore RMB exchange rate (CNH).
MSCI China A-Share Inclusion Overview:• China A-Shares are vastly underrepresented in global indexes. While the United States has a weight of 57.56% in the MSCI
All Country World Index, China only has a weight of 4.98%1.
• MSCI is incrementally realigning China’s overall weight in their Global Standard Indexes through the inclusion process, and by the end of 2019, MSCI’s definition of China included 264 large-cap and 172 mid-cap A-Share securities, including 30 securities from the ChiNext board2.
• Upon completion, China A-Shares are predicted to account for about 20% of the MSCI Emerging Market (EM) Index3.
MSCI China A Index Overview:• The Index captures large and mid-cap equities listed on the Shanghai and Shenzhen stock exchanges and reflects the full
2019 inclusion of China A-Shares in the MSCI Emerging Markets Index.
• On March 11, 2019, the Hong Kong Stock Exchange announced a license agreement with MSCI to introduce futures contracts on the MSCI China A Index4.
• There are a total of 473 constituents1 giving investors diverse exposure to A-Shares.
KBAKraneShares MSCI China A Share UCITS ETF
3
Introduction
1. Data from MSCI as of 30/Jun/2020.2. MSCI, “MSCI Will Increase the Weight of China A Shares in MSCI Indexes”, 28/Feb/2019.3. Data from MSCI as of 30/Jun/20204. HKEx, MSCI China A Index Futures, 11/Mar/2019.
4
1990 Nov 2019
Shanghai and Shenzhen Stock Exchanges launch
Shenzhen Hong Kong Stock Connect launchesEligible Shenzhen listed stocks now freely tradable through international brokerage accountsA
ug 2
016
MSCI announces inclusion of A-Shares in Global Standard Indexes starting June 1st, 2018Ju
n 20
17
CICC (China International Capital Corporation) acquires a 50.1% majority stake in Krane Funds Advisors, LLC
Oct
201
7
First phase of China A-Share Inclusion completed
QFII is established allowing the first international access to A-share market
2002
RQFII is established• Allowing international
access to A-share market with daily liquidity
• First international funds with Interbank Bond Market exposure approved
2011
1990
KraneShares Bosera MSCI China A-Share ETF (Ticker: KBA) launches KraneShares partners with Bosera Asset Management to list KBA, the first MSCI-linked China A-Share ETF in the U.S.
Mar
201
4 MSCI puts China A-Shares up for inclusion within their Global Standard Indexes
Shanghai Hong Kong Stock Connect launchesEligible Shanghai listed stocks now freely tradable through international brokerage accounts
Nov
201
4
KraneShares launches its first U.S. listed China ETF20
13
The Evolution of China’s Capital Markets and KraneShares
KraneShares E Fund China Commercial Paper ETF (Ticker: KCNY) LaunchesKraneShares partners with E Fund Asset Management to list KCNY, giving investors exposure to China’s Interbank Bond Market
Dec
201
4
Oct
201
6 China’s currency, the RMB, designated a reserve currency by the International Monetary Fund
Mar
201
8
Bloomberg announces it will add China’s Interbank Bond Market to the Bloomberg Barclays Global Aggregate Indices starting April 2019
Second phase of China A-Share Inclusion scheduled for completion
Sep
2018
HKEX launches futures contracts for the MSCI China AIndexM
arch
201
9
Introduction
The China A-Share market is too big to ignore.Even though China is the world’s second largest economy and stock market, China A-Shares are still underrepresented in global capital markets.
5
Why China?
1. Data from MSCI as of 30/Jun/2020, retrieved 30/Jun/2020. See page 17 for index definitions
0
10
20
30
40
50
60
70
US Japan China UK France
%
Top 5 Country Weights in the MSCI All Country World Index (Market Cap Weighted)1
0
5
10
15
20
25
30
US China Japan Germany India
%
Top 5 Country Weights in the MSCI All Country World Index (GDP Weighted)1
Emerging Market Evolution• China’s weighting in the MSCI ACWI Index has grown since 1997 but remains a small percentage overall.
• We believe China will occupy a larger portion of both the MSCI All Country World Index and investors’ portfolios in general as its markets continue to open up.
Data from Morningstar as of 31/Dec/2019. See page 16 for index definitions. 6
Why China?
84%
86%
88%
90%
92%
94%
96%
98%
100%
12/201912/201712/201512/201312/201112/200912/200712/200512/200312/200112/19995/1997
Historical Developed and Emerging Market Allocations within the MSCI ACWI Index
Developed Markets Emerging Markets ex China China
The Index MattersMSCI is a trusted index provider for the largest global investment managers.
1 As of June 30, 2018, as reported on September 30, 2018 by eVestment, Morningstar and Bloomberg, retrieved 30/Jun/2020.2 Based on latest P&I AUM data and MSCI clients as of March 2018, retrieved 30/Jun/2020.3 As of September 2018 , retrieved 31/Mar/2020; defined as each share class of an exchange traded fund, as identified by a separate Bloomberg ticker. Only primary listings, and not cross-listings, are counted.4 As of Dec 2016, according to Intersec LLC , retrieved 30/Jun/2020.
7
Index Overview
MSCI’s current Global Standard definition of China only represents a small portion of China’s total market. The MSCI China Index was historically limited to Chinese companies listed on the Hong Kong Stock Exchange. Recently, MSCI expanded this definition to include US-listed Chinese companies and China A-shares. This definition represents only a small percentage of Chinese stocks.
Source: MSCI Data as of 30/Jun/2020.See page 17 for index definitions. 8
Index Overview
MSCI’s Current Global Standard Definition of China
MSCI China Index Hong Kong and US = 88.2%China A-Shares = 11.8%711 Stocks
MSCI’s Definition of Entire Mainland A-Share Market
MSCI China A Onshore IMI Index Shanghai and Shenzhen only2,884 Stocks
Mainland China A-Shares
40%Hong Kong
Listed Chinese
Companies40%
U.S. Listed Chinese
Companies20%
SHARE CLASS BREAKDOWN OFTHE MSCI CHINA ALL SHARES INDEX
China30.5
China A Shares
4.0Korea12.2Taiwan
10.5
India8.3
Others34.5
See page 17 for index definitions
On February 28, 2019, MSCI made a larger than expected China A-Share inclusion announcement. MSCI increased the inclusion factor of China A-Shares in their Global Standard Indexes from 5% to 20% in 2019.
Currently, $1.8 trillion track the MSCI EM Index. Up to $360b are expected to be reallocated to China A-Shares after full inclusion.
• On September 3, 2018 MSCI completed the first 5% inclusion of China A-Shares within the MSCI Emerging Markets Index.
• MSCI increased the inclusion factor of China A-Shares from 5% to 20% by the end of 2019.
• The full proposed inclusion weight is projected to reach 20% of the Emerging Markets Index.
• We believe multiple inclusions could provide a sustained catalyst for the outperformance of the Mainland market.
China30.5
China A Shares
0.8Korea15.0Taiwan
11.1
India8.3
Others34.3
2018 Inclusion1 2019 Inclusion2 Future Proposed Inclusion3
1. MSCI.com/China, retrieved 30/Jun/20202. “MSCI Will Increase The Weight Of China A Shares In MSCI Indexes” MSCI, 30/Jun/20193. Data from MSCI as of 30/Jun/2020
9
Inclusion Overview
China A-Share Inclusion in MSCI EM
China29%
China A Shares20%
Korea10%
Taiwan11%
India7%
Others23%
Inclusion Overview
101. Data from Bloomberg and CSI as of 30/Jun/2020, calculated by KraneShares.2. Data from Bloomberg as of 30/Jun/2020. See page 17 for index definitions.
We believe that the MSCI China A Index has distinct advantages over the CSI 300 Index.• The CSI 300 Index, originally built for domestic Chinese investors, consists of the 300 largest China A-Share stocks ranked by market capitalization.
• In comparison, the MSCI China A Index currently tracks 473 securities deemed most suitable for international investors by MSCI.1
• Over 80% of the CSI 300 constituents are included in the MSCI China A Index, which contains a larger set of securities2.
• We believe gaining exposure to China A-Shares through an MSCI index provides international investors with several distinct advantages.
MSCI China A Index and CSI 300 Index Comparison2
MSCI China A Index CSI 300 Index MSCI Advantage
Index Construction Methodology
Based on MSCI’s Global Investable Market Index (GIMI) methodology
Largest 300 China A-share companies ranked by full market capitalization
Consistent with MSCI EM and MSCI ACWI which enables building and monitoring portfolios in a cohesive manner
Eligible UniverseOnly A-shares that can be traded through Stock Connect
Any A-share listed in Shanghai and Shenzhen Stock Exchanges
No QFII or RQFII quota restraints
Foreign OwnershipTakes into account Chinese regulator’s foreign ownership limits of 30%
Does not consider foreign ownership limits, creating potential for tracking error
Tailored for foreign investors
Size Segmentation
Large Cap Size Segment targets 70%, Standard Size Segment targets 85%, and IMI Size Segment targets 99% of the coverage universe
Uses a fixed number of constituentsmethodology
Designed to dynamically reflect the growing China capital markets
Index Review Semi-Annual and Quarterly Index Reviews Semi-Annual Reviews More timely reflection of the market
11
China Mainland Market Capitalization and 30 day Average Trading Volume Decile Breakdown as of 31/Mar/2020
The MSCI China A Index stocks are the largest and most liquid stocks in the A-Share market.
• There are currently 4,191 A-Shares listed in Mainland China.
• A-Shares contain predominantly mega cap and large cap securities in the top decile of the Mainland market in terms of market capitalization and 30-day average trading volume.
Data from Bloomberg as of 30/Jun/2020.
A-Share Characteristics
Average Market Cap 30 Day Average Daily Volume
91%KBA Net Assets 1 13.7 B 63.0 M
7%KBA Net Assets 2 2.8 B 46.7 M
2%KBA Net Assets 3 1.7 B 41.7 M
4 1.1 B 28.5 M
5 841.6 M 23.0 M
6 660.0 M 18.6 M
7 535.6 M 16.2 M
8 455.3 M 14.2 M
9 397.4 M 11.7 M
Mainland China A-Share equities exhibit low correlation to other global markets.As Emerging Markets (EM) have become more correlated with Developed Markets over the years, the diversification benefits of EM investing have largely diminished.
• Frontier Markets, countries whose stocks are less mature than those in EM, still have relatively low correlations with the rest of the world.
• Remarkably, China A-Shares exhibit an even lower correlation to the MSCI All Country World Index than Frontier Markets.
• MSCI ACWI Index (ACWI) - All Country World Index
• MSCI EAFE Index (EAFE) - Europe, Australasia and Far East
• MSCI Emerging Markets Index (EM) - Emerging Markets
• The MSCI USA Index (USA) – United States of America
• MSCI China Index (China) - Chinese companies listed in Hong Kong & USA
• MSCI Frontier Markets Index (Frontier) - Frontier Markets
• MSCI China A Index (China A) - Chinese companies listed on Shanghai and Shenzhen Stock Exchanges
Source: Table from Bloomberg, weekly correlation from 31 March 2010 to 31 March 2020
MSCI Indexes Correlation to MSCI China A Index
Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. See page 16 for index definitions. Past performance is no guarantee of future results. 12
A-Share Characteristics
ACWI EAFE EM USA China Frontier China A
ACWI 1 0.942 0.837 0.955 0.692 0.539 0.349
EAFE 0.942 1 0.807 0.817 0.664 0.551 0.317
EM 0.837 0.807 1 0.707 0.867 0.522 0.421
USA 0.955 0.817 0.707 1 0.573 0.475 0.31
China 0.692 0.664 0.867 0.573 1 0.423 0.583
Frontier 0.539 0.551 0.522 0.475 0.423 1 0.28
China A 0.349 0.317 0.421 0.31 0.583 0.28 1
131The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.
Data from FactSet as of 30/Jun/2020. See page 17 for index definitions.
A-Share Characteristics
KBA 5-Year Average: 14.9
10
12
14
16
18
20
22
24
31-DEC-2014 31-DEC-2015 30-DEC-2016 29-DEC-2017 31-DEC-2018 31-DEC-2019
Price/Earnings Ratio of KraneShares Bosera MSCI China A Share ETF(12/31/2014-6/30/2019)
KBA MSCI EM S&P 500 KBA Average
Current Valuations in the Mainland Chinese equity market are lower than those in the US equity market.KBA is currently close to its long run Price-Earnings (P/E)1 average.
-$8,000
-$4,000
$0
$4,000
$8,000
$12,000
$16,000
$20,000
7,000
7,500
8,000
8,500
9,000
9,500
10,000
10,500
1/2/2020 2/2/2020 3/2/2020 4/2/2020 5/2/2020 6/2/2020
Mill
ions
Gro
wth
of 1
0,00
0 un
its
Northbound Connect Flows vs. KBA (US) Performance
KBA (Left) Cumulative Northbound Connect Inflow (Right)
14
Foreign investors largely refrained from buying the dip in Mainland equities surrounding the COVID-19 pandemic and have been allocating to catch up with the market rebound since its bottom in mid-March.Year to date, foreign investors have bought $15.27 billion* worth of A-shares through Stock Connect.
Data from Bloomberg as of 30/Jun/2020, *year-to-date as of 30/Jun/2020. See page 17 for index definitions.
Market reacts to Covid-19 Outbreak in China
Market reacts to Covid-19 Outbreak in US
Buying The Dip1/30 to 2/20: Inflows +6 billion
A-Share Characteristics
Selling The Dip2/20 to 3/26: Outflows -15 billion
Playing Catch-Up3/26 to 6/30: Inflows +20 billion
15
Investment Strategy:
KBA is benchmarked to the MSCI China A Index which captures large and mid-cap representation across China securities listed on the Shanghai and Shenzhen exchanges (A-shares). Over the coming years, MSCI will complete the incremental inclusion of China A-shares into their Global Standard Indexes, including the MSCI Emerging Markets Index, which may potentially benefit the securities KBA holds today. The MSCI China A Index is designed for global investors accessing the A-share market using the Stock Connect framework and is calculated using China A Stock Connect listings based on the offshore RMB exchange rate (CNH).
ExchangeLondon Stock Exchange
Management Fee 40bps
Listing Date 26/Jun/2019
Index Name MSCI China A Index
Index Ticker NU718708
ISIN Code IE00BJLFK515
SEDOL BJ9JTF8
UK Reporting Fund Status Reporting Fund
Investment Structure UCITS
Base Currency USD
AUM $85.53mm
KraneShares MSCI China A Share UCITS ETF (LSE: KBA)
Key Fund Information
Top Ten Holdings as of 30/Jun/2020The Fund’s Holdings Are Subject to Change. % of Fund
KWEICHOW MOUTAI CO LTD-A 5.76
PING AN INSURANCE GROUP CO-A 2.43
CHINA MERCHANTS BANK-A 2.2
WULIANGYE YIBIN CO LTD-A 2.1
JIANGSU HENGRUI MEDICINE C-A 1.51
CHINA YANGTZE POWER CO LTD-A 1.31
CONTEMPORARY AMPEREX TECHN-A 1.19
LUXSHARE PRECISION INDUSTR-A 1.11
FOSHAN HAITIAN FLAVOURING -A 1.04
INDUSTRIAL BANK CO LTD -A 1.04
KraneShares MSCI China A Share UCITS ETF is “A sub fund of KraneShares ICAV (the “ICAV”). The ICAV is authorised as a UCITS in Ireland and regulated by the Central Bank of Ireland.
For Investors in the United Kingdom (UK). Investors should read the Key Investor Information Document and Prospectus prior to investing. The Fund seeks to track the performance of an index composed of companies from developed countries.
KBA Performance History as of 30/Jun/2020
Index returns are for illustrative purposes only and do not represent actual Fund performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Cumulative % Average Annualized %
3 Mo 6 Mo Since Inception 1 Yr 3 Yr 5 Yr
Fund NAV 15.61% 4.22% 12.60% 11.62% – –
Index 15.69% 5.05% 14.12% 13.08% – –
16
Conclusion:
• On June 1, 2018, MSCI commenced the multi-year process
of including China A-Shares into their Global Standard
Indexes.
• This rebalance has triggered what may be one of the
largest asset transfers in recent history, causing hundreds
of billions of dollars to be reallocated to China A-Share
securities KBA holds today.
• We believe full inclusion could take up to five years,
potentially providing a sustained catalyst for the
performance of China’s Mainland market.
Potential Full Inclusion of China A-Shares Within the MSCI Emerging Markets Index
China29%
China A Shares
20%
Korea10%
Taiwan11%
India7%
Others23%
Data from MSCI as of 30/Jun/2020.
Index Definitions:
MSCI China Index: captures large and mid cap representation across China H shares, B shares, Red chips and P chips.
MSCI All China Investable Market Index (IMI): captures large, mid and small cap representation across all China securities that are listed in China and Hong Kong, the US and in Singapore. The index includes: A-Shares, H shares, B shares, Red chips and P chips as well as China securities that are listed on the NYSE Euronext (New York), NASDAQ, New York AMEX and Singapore exchanges.
MSCI ACWI Index: captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries.
The MSCI ACWI GDP Weighted Index: is based on the flagship MSCI ACWI Index, its parent index, and includes large and mid cap stocks across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. The index uses a different weighting scheme than its cap weighted parent index, however. The weight of each country in the index is derived from its economic size (using GDP data) rather than the size of its equity market. Over time, GDP data tends to have more stability than equity market prices.
The MSCI EAFE Index: is an equity index which captures large and mid cap representation across Developed Markets countries around the world, excluding the US and Canada.
S&P 500 Index: is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ
The MSCI Emerging Markets Index: captures large and mid cap representation across 23 Emerging Markets (EM) countries.
The MSCI USA Index: The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market.
The MSCI Frontier Markets (FM) Index: captures large and mid cap representation across 29 Frontier Markets countries.
The MSCI China A Index: captures large and mid cap representation across China securities listed on the Shanghai and Shenzhen exchanges.
The MSCI China A International Index: is a free-float adjusted market capitalization weighted index that is designed to track the equity market performance of large-cap and mid-cap Chinese securities listed on the Shanghai and Shenzhen Stock Exchanges. The Index is based on the concept of the integrated MSCI China equity universe with mainland Chinese securities included.
The MSCI United Arab Emirates (UAE) Index: designed to measure the performance of the large and mid cap segments of the UAE market.
CSI 300 Index: consists of the 300 largest and most liquid A-share stocks. The Index aims to reflect the overall performance of China A-share market..
17
18
Important Notes
Carefully consider the Funds’ investment objectives, risk factors, charges and expenses before investing. This and additionalinformation can be found in the Funds' full and summary prospectus, which may be obtained by visiting www.kraneshareseu.com. Read the prospectus carefully before investing.
This information is being communicated by KraneShares, which is an appointed representative of DMS Capital Solutions UK Limited, which is authorised and regulated by the Financial Conduct Authority in the United Kingdom under the reference number 503325.
UCITs shares are not redeemable with the issuing fund other than in large Creation Unit aggregations. Instead, investors mustbuy or sell UCITs Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value (NAV) when buying and receive less than net asset value when selling. The NAV of the Fund’s shares is calculated each day the national securities exchanges are open for trading as of the close of regular trading on the London Stock Exchange (“LSE”), normally 4:30 P.M. Eastern time (the “NAV Calculation Time”). Shares are bought and sold at market price not NAV. Closing price returns are based on the midpoint of the bid/ask spread at 4:30 P.M. Eastern Time (when NAV is normally determined).
Investing involves risk, including possible loss of principal. There can be no assurance that a Fund will achieve its stated objectives. The Funds are subject to political, social or economic instability within China which may cause decline in value. Fluctuations in currency of foreign countries may have anadverse effect to domestic currency values. Emerging markets involve heightened risk related to the same factors as well as increase volatility and lower trading volume.
The ability of the KraneShares Bosera MSCI China A UCITs to achieve its investment objective is dependent on the continuous availability of A-Shares and the ability to obtain, if necessary, additional A-Shares quota. If the Fund is unable to obtain sufficient exposure due to the limited availability of A-Share quota, the Fund could seek exposure to the component securities of the Underlying Index by investing in other types of securities. The Fund may invest in derivatives, which are often more volatile than other investments and mat magnify the Fund’s gains or losses.
In Switzerland, the Fund has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland, Tel: +41 21 311 17 77, email: [email protected]. The Fund’s paying agent is Helvetische Bank AG. In respect of the Shares distributed in or from Switzerland, the place of performance and jurisdiction is Lausanne (Switzerland).
Although the information provided in this document has been obtained from sources which Krane Funds Advisors, LLC believes tobe reliable, it does not guarantee accuracy of such information and such information may be incomplete or condensed. [R_DMS]